US stocks experienced a strong rebound on Thursday, largely driven by Microsoft's exceptional performance. The S&P 500 climbed 1.7% to 7,437.63 points, recovering its previous day's losses. The Dow Jones Industrial Average rose 1.2% to 52,208.06 points, and the Nasdaq composite, heavily influenced by artificial intelligence stocks, rallied 2.8% to 25,122.18 points. This surge was attributed to renewed optimism around AI, specifically after Microsoft reported stronger-than-expected profits, with its Azure cloud business showing robust growth.
Microsoft's stock soared 15.5%, marking its best day in nearly 18 years and boosting its market value by $450 billion, the largest single-day increase on Wall Street. CEO Satya Nadella indicated that significant investment in AI is now translating into profits. Following a selloff in chipmakers, the PHLX chip index surged 8.2%, with Micron Technology jumping 18%, Sandisk soaring 26%, and Advanced Micro Devices also rising, though chipmakers are still facing a projected 21% monthly slide for July.
Despite the equity rally, bond markets remained on edge due to ongoing inflation concerns. The yield on the 10-year Treasury held steady at 4.67%, while the 30-year Treasury yield ticked up to 5.22% from 5.20%, after having previously shot up from 5.09%. This persistent upward pressure on yields follows the Federal Reserve's decision to leave interest rates unchanged on Wednesday, with Fed Chair Kevin Warsh giving few clear signals on future rate actions to combat inflation. Analysts like Seema Shah of Principal Asset Management questioned whether the Fed is prepared to act if inflation worsens or if it relies on financial markets to achieve the same outcome. Zachary Griffiths of CreditSights noted that Treasury yields have already repriced higher without Fed action, effectively tightening financial conditions.
A "hawkish hold" by the Fed, where rates are paused but future hikes are possible, is generally seen as a headwind for stocks, as it suggests borrowing costs could remain elevated longer than anticipated. While the immediate relief from no rate hike was short-lived, the market's focus quickly shifted to concerns about sustained inflation. Higher rates could control inflation but may also slow the economy and negatively impact stock prices. The prospect of further rate hikes also makes safer assets like money market funds and shorter-dated Treasuries more attractive compared to equities.
Market volatility was high, with Deutsche Bank indicating that the Wednesday Fed decision was the most uncertain since December 2018, with markets pricing in a roughly 36% chance of a rate hike. However, analysts like Keith Lerner at Truist Advisory Services and Sameer Samana at Wells Fargo Investment Institute remain constructive on US equities, citing strong adoption of technology, a resilient economy, and favorable financial conditions, suggesting the bull market remains intact despite near-term fluctuations.
